THE COST OF CUTTING SPEW

Climate Bill Would Raise Costs Slightly
John M. Broder, August 4, 2009 (NY Times)
and
Climate bill to raise costs 20%, EPA says
Daniel Whitten, August 4, 2009 (Bloomberg News via Cincinnati Enquirer)

SUMMARY
Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009, from the Energy Information Administration (EIA) of the U.S. Department of Energy (DOE), was requested by the bill’s authors to settle the question of how much the controversial cap&trade provision of it will cost the U.S. taxpayer and what impacts it can be expected to have on U.S. business.

From the EIA report on ACESA - click to enlarge

The cap&trade provision is in Title III of ACESA. It is designed to reduce U.S. greenhouse gas emissions (GhGs) by capping them and progressively reducing them and by creating a market-mechanism by which emitters can manage the costs and opportunities of a transition to a New Energy economy. ACESA’s other titles include provisions and incentives for New Energy, Energy Efficiency and New Energy research and development (R&D).

From the EIA report on ACESA - click to enlarge

Bottom line:
(a) Energy prices increase a little. Electricity and natural gas increases are mitigated through 2025 by free allowances and rise only 3%-to-4% (to 9.5 to 9.6 cents per kilowatt-hour in 2020, 2007 money). By 2030, allowances will be costly, few will be free and electricity prices could be up 19% (11.1-to-17.8 cents per kilowatt-hour).
(b) A slightly increased energy price leads to slightly lower real economic output which leads to slightly lower purchasing power which leads to slightly lower demand for goods and services which leads to a slightly reduced GDP. It falls 0.2%-to-0.9% from 2012 to 2030. (EIA makes no prediction about how much GDP would fall if global climate change is not reversed.)
(c) Per household consumption drops an average $114 per year in 2020 (2007 dollars). It drops $288 in 2030.

These conclusions are very comparable to conclusions drawn about the cap&trade part of ACESA in studies by both the Environmental Protection Agency (EPA) and the Congressional Budget Office (CBO), validating President Obama's point that the cost of cutting U.S. spew will be about a postage stamp per day for the average family.

The President often neglects to add that if U.S. spew is not cut and global climate change is not managed the cost of a postage stamp could be more than the cost of the trucks now used to deliver the mail.

From the EIA report on ACESA - click to enlarge

Title III, cap&trade:
- Covers ~84% U.S. 2016 GhGs
- Cuts them progressively from 2012 thru 2050
- 17% cut by 2020 (from 2005 baseline)
- 83% cut by 2050
- Compliance: Capped entities submit (bankable) allowances for GhGs or purchase, for a small portion of GhGs, offsets (domestic or international)
- Use of offsets can be expanded by assent of the U.S. Environmental Protection Agency (EPA) head
- Includes GhG standards for hydrofluorocarbon (HFC) emissions and black carbon
- Sets provisions to govern allowance markets, including limits and regulations on derivatives

From the EIA report on ACESA - click to enlarge

Title I
- Contains a Federal combined Energy Efficiency and Renewable Electricity Standard (RES)
- Provisions for carbon capture and storage technology (CCS) trials
- Performance standards for new coal plants
- R&D support for electric vehicles
- Support for a Smart Grid
- Establishes a Clean Energy Deployment Administration

Title II
- Landmark provisions for building, lighting, appliance, and vehicle energy efficiency programs that could cut U.S. GhGs 20% or more

Title IV
- Provisions to protect U.S. business competitiveness, dislocated U.S. workers and consumers as they transition to the New Energy economy

From the EIA report on ACESA - click to enlarge

Title V
- Sets out regulations on domestic agricultural and forestry-related offsets to be used as part of cap&trade

EIA’s analysis used its National Energy Modeling System (NEMS). It’s base case scenario came from its Annual Energy Outlook 2009 (AEO2009) (April 2009) Reference Case.

From the EIA report on ACESA - click to enlarge

The analysis included all the items above except:
- the strategic allowance reserve
- the separate cap-and-trade program for HFCs
- the GhGs of activities not in cap&trade
- allowances to coal merchant plants
- new efficiency standards for transportation equipment
- effects of increased investment in energy R&D
- the Clean Energy Deployment Administration, which could be the most important item not evaluated because it has the potential to drive the development of New Energy capacity

From the EIA report on ACESA - click to enlarge

The EIA report focuses on the impacts of energy choices made by consumers and the implications of those decisions for the economy. It does not account for health or environmental benefits of ACESA.

The real answer to the question of how much emissions reductions will cost is, “it depends.”

From the EIA report on ACESA - click to enlarge

EIA’s analysis divided its conclusions into 6 main categories, based on the 2 main things the cost of emissions reductions might depend on:

(1) The role of offsets.
- Depends on how much energy is used and how many allowances are needed. Estimates range from 150 million metric tonnes of international offsets used by 2020 to 1.5 billion metric tonnes used shortly after 2012.
- Depends on decisions about regulation of emissions made by the EPA and on international commitments to stop deforestation.
- Depends on each individual capped sector and entity and could depend on state regulators.

(2) The “timing, cost, and public acceptance” of New Energy and Energy Efficiency technologies.
- Will there be more nuclear? Will there be CCS for fossil fuels? Will there be alternative fuel vehicles?
- If the technological breakthroughs come quickly, by 2030, will capped entities save their banked allowances and not cut emissions between 2030 and mid-century?

From the EIA report on ACESA - click to enlarge

The 6 main possibilities (analysis cases):

(1) In the ACESA Basic Case, key New Energy/Energy Efficiency technologies and nuclear and fossil fuels with CCS are developed and deployed on a large scale, meeting the ACESA GhG cuts without major obstacles. Domestic and international offsets are used and not severely constrained by cost, regulation, or the pace of international negotiations. Anticipating harder caps and higher allowance prices after 2030, entities and investors bank more allowances by 2030 than are needed through midcentury.

(2) The ACESA Zero Bank Case is similar to the Basic Case but no banked allowances are held in 2030. This means that lots of New Energy/Energy Efficiency is available at reasonable prices, leading to a tightening of caps after 2030 and more New Energy/Energy Efficiency and fuel efficient transportation.

(3) The ACESA High Offsets Case is similar to the Basic Case except there is near-immediate use of international offsets without regard to market impediments.

From the EIA report on ACESA - click to enlarge

(4) The ACESA High Cost Case is similar to the Basic Case except that nuclear, coal with CCS and dedicated biomass technologies cost 50% more.

(5) The ACESA No International Case is similar to the Basic Case but few international offsets are used because of cost, regulation, and/or slow progress in reaching international agreements.

(6) The ACESA No International/Limited Case combines a lack of international offsets and no more New Energy/Energy Efficiency technologies, nuclear, fossil with CCS, and dedicated biomass than Reference Case levels through 2030.

Additional analysis cases: (a) an accelerated Corporate Average Fuel Efficiency (CAFE) standards (with required 35-mpg vehicles by 2016) case; (b) a 5% discount case (with fewer auctioned allowances); (c) a case with limited nuclear, CCS, and biomass capacity; (d) an accelerated New Energy/Energy Efficiency case; and (e) a more banked allowances case.

EIA sees the cases depending on almost everything going right or almost everything going wrong as unlikely and therefore sees the cases with moderate access to international offsets, moderate banking of allowances and moderate development of New Energy and Energy Efficiency technologies as the closest to what will really happen.

From the EIA report on ACESA - click to enlarge

COMMENTARY
Point of personal privilege: Believe nothing anybody writes or says about the study until it is clear they really understand cap&trade:

Example 1: Bloomberg News reported “polluting companies would initially meet most greenhouse gas reduction targets by sponsoring forestry and agriculture projects rather than cutting their own emissions…” as if this was some kind of failure of the legislation. NO! This is how the legislation is designed. Companies can start using free allowances to cut emissions with offsets as they slowly transition to the necessity of building their own New Energy and Energy Efficiency.

Example 2: Bloomberg News reported the measure “…is likely to increase electricity prices to 12 cents per kilowatt hour in 2030, or 20 percent higher than the cost if there is no climate law…” If there is no climate law in 2030, the few English-speaking humans left in the upper Midwest, the UK and New Zealand will probably be burning buffalo chips in their campfires so Bloomberg could be right about that one.

From the EIA report on ACESA - click to enlarge

Key Findings of the EIA study:

(1) Offsets are cheaper and will be used first to reduce emissions through 2030. From 2012 to 2030, the Basic Case sees emissions cuts as 39% of compliance.
(2) Most emissions cuts will come in the electricity generation sector, 80-to-88% of reductions through 2030. Part will come from the use of New Energy and part from greater Energy Efficiency.
(3) If New Energy/Energy Efficiency, new nuclear and CCS are not developed and deployed, capped entities will turn to offsets and replace coal with natural gas. In such a case, natural gas generation could provide 68% of GhG cuts through 2030.

From the EIA report on ACESA - click to enlarge

(4) GhG cuts from changes in the use of fossil fuels in the residential, commercial, industrial and transportation sectors are small (12-to-20% through 2030) relative to those in the electricity generation sector, even if gas is 20-to-35 cents per gallon more expensive.
(5) Allowance prices (2007 dollars) will depend on how many international and domestic offsets are available and how much New Energy/Energy Efficiency technology is developed/deployed. Base case prices are $32 per metric ton in 2020 and $65 per metric ton in 2030 but the price could range from $20-to-$93 per metric ton in 2020 and from $41-to-$191 per metric ton in 2030.
(6) Energy prices increase. Electricity and natural gas increases are mitigated through 2025 by free allowances and rise only 3%-to-4% (to 9.5 to 9.6 cents per kilowatt-hour in 2020). By 2030, allowances will be costly, few will be free and electricity prices could be up 19% (11.1-to-17.8 cents per kilowatt-hour).

From the EIA report on ACESA - click to enlarge

(7) A slightly increased energy price leads to slightly lower real economic output which leads to slightly lower purchasing power which leads to slightly lower demand for goods and services which leads to a slightly reduced GDP. It falls 0.2%-to-0.9% from 2012 to 2030.
(8) Per household consumption drops an average $114 per year in 2020. It drops $288 in 2030.
(9) Free allocation of emissions allowances protects energy-intensive and trade-vulnerable industries (but compromises GhG cuts).

From the EIA report on ACESA - click to enlarge

Other “insights” developed by EIA:

(1) Everything depends on the base case scenario. If EIA’s 2009 Outlook is off, everything is off. And the main thing NewEnergyNews has learned from reading EIA forecasts is that, as Yogi Berra said, “…predictions are hard, especially about the future.” Especially about 2 decades into the future, the EIA might add. Technological and demographic trends, laws and regulations, and consumer behavior change. Technology development, demographics, economic growth, and energy resources evolve along slightly different paths that become radically different eventualities.
(2) ACESA provides for a strategic allowance reserve. It will protect against short-term volatility in allowance prices but does not preclude the high allowance price cases analyzed.
(3) Free allowances eases electricity and natural gas price impacts. They also reduce the GhG-reducing impacts of cap&trade.
(4) Reduced use of power due to caps and prices does not eliminate the urgency of streamlining the siting of new generation and transmission infrastructure.
(5) It is necessary to make “substantial progress” in New Energy/Energy Efficiency technologies to meet ACESA targets for the 2030-to-2050 period because the potential for reductions in Old Energy will by then be exhausted and other reductions will be prohibitively expensive.

From the EIA report on ACESA - click to enlarge

QUOTES
- NY Times: “The new report…found that the bill’s provisions would cause electricity rates to rise 3 percent to 4 percent and gasoline prices to rise 23 cents a gallon by 2020, causing a fall in household consumption of between $21 and $235 a year…Supporters of the legislation said the study bolsters their claims that the bill will only modestly affect consumers and the American economy. But opponents said the report presents a grimmer picture of higher costs beyond 2025 when the program is fully implemented.”
- Bloomberg News: “The report…says that polluting companies would initially meet most greenhouse gas reduction targets by sponsoring forestry and agriculture projects rather than cutting their own emissions…The measure, passed by the House and under consideration by the Senate, is likely to increase electricity prices to 12 cents per kilowatt hour in 2030, or 20 percent higher than the cost if there is no climate law using 2007 dollars. Before 2025, the price would go up 3 to 4 percent, the study says.”

From the EIA report on ACESA - click to enlarge

- From EIA’s analysis: “EIA cannot attach probabilities to the individual policy cases. However, both theory and common sense suggest that cases that reflect an unbroken chain of either failures or successes in a series of independent factors are inherently less likely than cases that do not assume that everything goes either wrong or right. In this respect, the No International/Limited and Zero Bank Cases might be viewed as more pessimistic and optimistic scenarios, respectively, which bracket a set of more likely cases. Similarly, if actual access to international offsets is dependent on a series of independent regulatory and negotiating outcomes, cases with intermediate access to international offsets might be viewed as more likely than those representing either complete and immediate success across the board (High Offsets), or a permanent lack of progress (No International) in such activities.”

From the EIA report on ACESA - click to enlarge

- From EIA’s analysis: “Obstacles to siting major electricity generation projects and/or the transmission facilities needed to support the greatly expanded use of renewable energy sources are not explicitly considered in this report. However, the additional capacity needs in all of the ACESA cases suggest the need for review of siting processes so that they will be able to support a large-scale transformation of the Nation’s electricity infrastructure by 2030.”
- From EIA’s analysis: “Unless substantial progress is made in identifying low- and no-carbon technologies outside of electricity generation, the ACESA emissions targets for the 2030-to-2050 period are likely to be very challenging as opportunities for further reductions in power sector emissions are exhausted and reductions in other sectors are thought to be more expensive.”